The Fault is in R-Star

The September FOMC will see a rate hike, and the dots will move up a little. This will come after a sharp upward revision to the Fed’s Laubach-Williams model of the natural rate of interest, by about 72 bp, or three rate hikes. This was first explained by BEA revisions to historic GDP, but further investigation shows it is primarily a change in a model parameter called "lambda-g." We believe there may also be input data errors, which have yet to be explained. This brings the key model for the natural rate into line with the longer-run optimal rate "dot plot," and with the 10-year yield. While only a quant artifact, the revision is in step with a period of economic optimism by policymakers. We think that optimism is well-founded, and will lead to further rate hikes indexed to improving growth and inflation, which in that context will not be tightenings. Powell's expression of skepticism about "navigating by the stars," so close to the LW revision, justifies his continued dovishness and only gradual rate hikes.